I'm a thirty-year veteran of Wall Street and an outspoken critic of ineffective regulation and an advocate for economic and political sanity. Following a career as an in-house lawyer and industry regulator, I am now in private practice representing member firms, registered persons, Whistleblowers, and defrauded investors. I publish the RRBDlaw.com and the BrokeAndBroker.com websites.

[T]hough FINRA and some of the exchanges currently maintain their own separate audit trail systems, there are numerous shortcomings regarding their accuracy, completeness, accessibility, and timeliness. These limitations make it impractical for regulators to readily follow orders as they are routed, aggregated, re-routed, and disaggregated across multiple markets.

For instance, after the Flash Crash of May 6, 2010, it took dozens of highly-trained economists, financial professionals, and data technologists four months to aggregate and process the information required to fully analyze just a few hours of trading on a single day. While that process was remarkable considering our limitations, and while we were able to identify the various causes of that event, efficient and effective market regulation requires that future analyses not take nearly that long.

In fact, it is even more difficult to perform some other types of market analyses because certain key information is never collected by audit trails – information such as the identity of the customers who originate orders, or the fact that two sets of orders may have originated with the same customer.

A consolidated audit trail that accurately tracks orders throughout their lifecycle and identifies the broker-dealers handling them will provide us with an unprecedented ability to effectively oversee the markets we regulate.

First, a consolidated audit trail will increase the data available to regulators investigating illegal activities such as insider trading, wash sales, and market manipulation. In particular, increased data will facilitate risk-based examinations, allow more accurate and faster surveillance, improve the process for evaluating tips, complaints, and referrals, and promote innovation in cross-market and principal order surveillance.

Second, a consolidated audit trail will significantly improve the ability of regulators to reconstruct broad-based market events in an accurate and timely manner. The sooner regulators can reconstruct the event, the sooner we can inform the public and determine what, if any, responses might be required.

Third, a consolidated audit trail will significantly increase the ability of regulators to monitor overall market structure, so that both the Commission and the SROs can be better informed about how our rules are affecting the markets. For example, having more precise data on the trading patterns of different types of market participants would help us better understand the impact of high frequency trading on the quality and fairness of our markets.

Finally, a consolidated audit trail will reduce the regulatory data production burdens on SROs and broker-dealers by reducing the number and types of ad hoc requests that regulators submit today. A consolidated audit trail that covers the entire market may also eliminate the need for multiple other, less efficient, reporting requirements that market participants must current comply with. . .

[T]he NMS plan that will be required pursuant to today’s rulemaking will ensure that in the near future, we will indeed have the information we need to smartly regulate today’s complex markets, and aid us in monitoring and overseeing those markets. To be clear, this rule is a sea-change for the securities markets – it requires the reevaluation and revamping of key aspects of market infrastructure; it will provide the Commission with data and other information that is critical to satisfying our statutory missions, and allowing us to oversee the markets in a smart and efficient manner.

If it were not for the Dodd-Frank rulemaking frenzy that has dominated the SEC’s agenda for the last two years, it would be abundantly clear that this rulemaking is a game changer. CAT is a tremendous step forward for the Commission, for the securities markets, and for investors, and I am pleased to support it. . .

[I] have been a consistent and vocal supporter of a consolidated audit trail.

. . .

Unfortunately, as currently structured, today’s rule falls short of establishing the process that investors deserve. It is with great disappointment that I am not able to support today’s rule. I am concerned that the proposal fails to set appropriately specific requirements to ensure the creation of a comprehensive market surveillance system, one that will capture the whole of the capital markets – including both regulated and currently unregulated markets. Moreover, I am concerned that the rule as currently drafted will limit innovation, and will fail to achieve cost savings.

[I] believe that the rule should not require that all the SROs jointly submit a single plan. Rather, the rule should provide the Commission with the ability to consider a fulsome discussion of competing solutions submitted by different sets of SROs. This would best serve the public interest and the protection of investors, by enabling the Commission to select the plan best designed to achieve the full range of benefits of a consolidated audit trail. As President Ronald Reagan once said, “excellence demands competition.”

The release states that the decision to require all SROs to jointly file one NMS plan with the Commission “is appropriate because such a requirement is expected to result in an NMS plan that is the product of negotiation and compromise among all of the SROs….” However, this assumes that all SROs will have equal weight and negotiation power, which is just not realistic. The process contemplated by Rule 613 could result in a battle of size, not necessarily one of ideas. And, I might add, not all compromises represent improvement.

. . .

In my view, as I’ve considered this rule since its proposal, the best way to address cost concerns is through competition by encouraging the submission of multiple NMS plans. As Henry Ford once said, “[c]ompetition is the keen cutting edge of business, always shaving away at costs.”9] Through the competition of ideas, the Commission would be in the best position to choose an NMS plan that will foster the creation of the most cost-effective, comprehensive consolidated audit trail.

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Sorry Bill, but I am confused, didn’t the SEC mandate this back in 1999 or there about? OATS? Wasn’t OATS developed while Mary was heading NASD? Weren’t the vast amount of new regulations because NASD was colluding with Market Makers to fix the price of securities being traded? And around and around we go. I think I hear fiddles..

Great minds think alike. I don’t recall all this 30-years in the coming stuff but that’s how they’re spinning it at the SEC if you read the releases and speeches that I cited. I sort of remember the SEC being in the forefront of trying to stall the development of ECNs and electronic trading at the behest of the old NASD market makers (does Madoff and Bear Stearns ring any bells?).

Regardless, just because I have to report this stuff doesn’t mean that I agree with it. I certainly concur with Schapiro that we need a consolidated audit trail and that the present state of things is idiotic. However, I am also very confident that none of this will see the light of day. You notice how the implementation is delayed for months? Wait till you see how eviscerated the final rules are; and that’s assuming that whatever may come back to the full Commission for a vote will be able to survive approval. Yesterday’s measure only won by 3:2. If Obama loses or Schapiro leaves or who knows what, that one vote majority is pretty slim.

“In a gambit with such low odds of success that traders question its legitimacy, someone wagered $1.7 million that Bear Stearns shares would suffer an unprecedented decline within days. Options specialists are convinced that the buyer, or buyers, made a concerted effort to drive the fifth-biggest U.S. securities firm out of business and, in the process, reap a profit of more than $270 million.

Whoever placed the bet used so-called put options that gave purchasers the right to sell 5.7 million Bear Stearns shares for $30 each and 165,000 shares for $25 apiece just nine days later, data compiled by Bloomberg show. That was less than half the $62.97 closing price in New York Stock Exchange composite trading on March 11. The buyers were confident the stock would crash.”

Let’s not fool ourselves. Insider trading is flagrant. I think back to all the firms, who were found to have their Investment banking divisions pressuring the research departments to write favorable reports for their customers. Then their brokers taking those reports and soliciting their customers. Even without the brokers knowledge of the cozy relationship between IB and research departments, the heads of those departments knew. Now would not each instance have been a separate fraud? I don’t think anyone was charged. Poor Martha..